Loss Aversion Hits Wall Street

Loss Aversion Hits Wall Street

“People who don’t have money don’t understand the stress,” said Alan Dlugash, a partner at accounting firm Marks Paneth & Shron LLP in New York who specializes in financial planning for the wealthy. “Could you imagine what it’s like to say I got three kids in private school, I have to think about pulling them out? How do you do that?”

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This kind of banker whining at the prospect of reduced bonuses has come in for a lot of derision, mostly justified. But it is a real enough phenomenon. People care about rates of change and trends just as much as they care about levels. You see this on the macroscopic scale as well. The United States in 2011 was a richer country than the United States in 1999 but people felt much better about the U.S. economy when GDP and incomes had been growing for years than they did during a period of stagnation and collapse. I'm not sobbing over these guys' fate, but the broader point is worth paying attention to. People like to be moving up the economic ladder and hate slipping downward.